The third quarterly (Q3 FY 04) report of the State Bank of Pakistan, released recently, speaks of promising developments in the economy evidenced by more than the expected GDP growth, increase in credit off-take, growth in revenue collection by the Central Board of Revenue (CBR), growth in large scale manufacturing (LSM), reduction in the fiscal deficit, increase in exports, etc.

The negative aspects, however, are: trade deficit because of higher import expenditure and deterioration in home remittances, etc. We shall first examine credit-off take.

As per the details given Table 4.4 (page 43) of the report, there has been credit growth of Rs 222.2 billion during July 2003-March,2004 out of which "personal loans" comprise 50.1 billion i.e. 22.55 per cent of the overall credit expansion.

The share of the agriculture sector in the credit expansion-which contributes almost 1/4th of the country's GDP- has been put at Rs 11 .5 billion i.e. 5.18 per cent of the overall credit expansion.

"Personal loans" now constitute quite a fair portion of the banks' lending. As per Table 2.1 appearing on page 24 of the report under review, the outstanding amounts of these loans as at the end of Q 3-FY 04 aggregate Rs 83 billion or 7.4 per cent of the banks' total outstanding advances of Rs 1120.102 billion [as of 27th March, 2004 as per the SBP's weekly press communique].

There have been general complaints that figures of various government departments about any specific item do not tally. In so far as credit expansion in the agriculture sector is concerned, the figures given in the report under review at two places also do not tally.

As mentioned earlier, credit expansion in this sector has been put at Rs 11.5 billion during the first 3 quarters but this figure shrinks to Rs 3.392 billion only at another place as would be evident from Table I appended:

What is the explanation for the squeeze in the credit expansion in the agriculture sector from Rs 6.691 billion [July-December, 2003] to 3.392 billion in Q 3-FY 04 when there has been substantial credit expansion during the first three quarters of FY 04 in all other sectors? Also who will explain the reasons of vast difference between the figures of Rs 11.5 billion (Table 4.4) and Rs 3.392 billion (Table 2.5).

It has been mentioned on page 20 of the report under review that disbursements by the Zarai Taraqqiati Bank (ZTB) for tractor purchases declined for the reason of shortage of funds.

This line of arguments put forward by the SBP researchers is not plausible at all as will be seen from Table I, recoveries by ZTB during July-December,2003 exceeded the disbursements by Rs 426 million while in Q 3 FY 04, recoveries exceeded the disbursements by 4.242 billion.

It will be another matter if the claim of cash recoveries is inaccurate and the recoveries merely represent rescheduling of the loans of the powerful feudals. In the face of such dismal operations of ZTB, the rationale of spending a lot of public money on inserting half/ quarter page advertisements in the papers in June,2004 in praise of the working / progress of the Bank is not understood.

GDP: The real GDP grew by 6.4 per cent in FY 04 as against the target of 5.3 per cent. The agriculture growth remained at 2.6 per cent as against the target of 4.2 per cent. The report states:

"There is evidence that high farm gate prices nonetheless led to a rise in farmers' income and consequently a rise in farm investment". What is the nature of evidence has not been enumerated. The other side of the picture, however, is that the benefit of the high prices does not reach the farmers but is usurped by the middlemen.

The deceleration in the agricultural growth was offset by higher growth in the industrial and services sectors. The growth in LSM sector is 17.1 per cent. What is the methodology of calculating the growth rate? Obviously, the data of the previous and the current period is compared.

The data for July-March/ FY 03 was based on 91 items while the data for the same period of FY 04 is based on 100 items [see footnotes to Table 2.9 page 23 and the footnotes at the end of the page] Obviously, the figures based on the production data of 91 items will be depressed.

Therefore, comparison of FY 04 data with the depressed figures of FY 03 will give an exaggerated rate of growth in LSM. The base of estimation has also been changed from 1980-81 to 1999-2000. One hopes that the impact of the change in the base has duly been accounted for in arriving at FY 04 figures.

Among the nine more items included in the LSM, we find wheat also [see footnote No 4 at the end of page 23] How "wheat" has been made a part of LSM will be best known to the compilers of the report.

The electric and gas distribution sectors registered growth of 22.5 per cent in FY 04 (Table 2.7 page 21). On page 22, it has been stated: "The value addition in electric and gas distribution was largely due to lower generation cost due to the increase in availability of water during H 1-FY 04, growing substitution with the relatively less costly fuel (coal and gas), as well as higher consumption in industry in general, and transport in particular".

The demand for electricity and gas is inelastic viz-a-viz the cost. The prices of electricity did not go down during FY 04. Therefore, linking the growth in the distribution of electricity with reduction in the cost of generation is wholly irrational even though Wapda may have saved a lot of resources and pocketed the same either for reducing its deficit or showing more earnings.

FISCAL SECTOR: The tax collection figures given on page 35 of the report under review are for 10 months July 2003- April 2004 and depict an increase of 12.8 per cent over the same period of FY 03. The details ( as per Table 3.5) are summarized below:

Figures in billion Rs.

FY 02 FY 03 FY 04

Direct taxes 108.5 109.5 118.7

Indirect taxes 197.6 242.6 278.5

Total 306.1 352.1 397.2

Ratio of direct

taxes to total 35.45% 31.10 % 29.88 % The direct taxes are universally believed to be progressive in nature while the indirect taxes are regressive in nature. It will be seen from the above data that the ratio of the direct taxes goes on coming down year-over- year.

The indirect taxes are instrumental in transferring resources from poor classes of the populace to the richer ones and consequently are one of the causes which are increasing poverty.

Not only that the direct taxes are squeezing, they also include the amount of withholding taxes which are for all intent and purposes indirect taxes. It has been mentioned on page 35 of the report under review that direct taxes include 56 per cent withholding taxes.

So, if we deduct Rs 66.47 billion from direct taxes of Rs 118.7 billion [56 per cent], the collection of direct taxes will stand reduced to 52.23 billion while the collection of indirect taxes will inflate to Rs 344.97 billion and consequently, ratio of direct taxes to the total collection will reduce from 29.88 per cent to 13.15 per cent only.

Since the days of Nawaz Sharif [early 1997], there have been talks of reforming the Central Board of Revenue (CBR) and expanding the tax net. Nothing has happened over the last 7 years or so.

The powerful CBR mafia will not permit any notable restructuring. The endeavour made in the year 2000 through survey to expand the tax net had also miserably failed.

BANKING SECTOR: In para 6.1 (pages 55-56), it has been indicated that the deposits have grown by 8 per cent in FY 04 and the rise in deposits is due to: (1) the re-intermediation of NSS investments (2) the record growth in credit off-take (for the third quarter of the fiscal year) and (3) rising incomes due to increasing economic activity.

The first argument does not seem to possess any rationale because the interest rates of the banks are still much lower than those available on the NSS instruments and consequently no body will be interested in shifting to the banks from NSS The argument (2) is not comprehensible: how credit off-take can increase the deposits? The 3rd argument may have some meaning.

NON-PERFORMING LOANS: The para 6.5 page 62 of the report under review indicates that the quantum of non-performing loans (NPLs) saw a decline of Rs 3.1 billion during Q3 FY 04 bringing down the outstanding stock to Rs 207 billion.

The picture is incomplete as the figure does not include the NPLs of the Development Finance Institutions (DFIs). Table II giving the complete picture is appended:

It will be seen from Table II that the total amount of NPLs as on the 31st March,2004 is Rs 219.679 billion. The NPLs of all the banks (excepting the specialized banks) increased during the third quarter of FY 04 as compared to the position of end- December, 2003.

Despite cash recovery of Rs 5.894 billion during January-March,2004, why the NPLs have gone down by Rs 3 billion only is not comprehensible. May be that the cash recovery figure is inaccurate.

How the outstanding stock of the NPLs of the specialized banks has been reduced by Rs 3.681 billion in January-March, 2004 when the cash recovery has been put at Rs 1.452 billion is yet other question mark? May be that the balance amount of Rs 2.229 billion has been written off.?

It will be observed from Table 6.5 (page 63) of the report under review that 66.1 per cent of the NPLs are covered by the provisions made by banks by debit to their Profit and Loss accounts over a period of time. So, for the NPLs of Rs 207 billion (excluding those of DFIs), provisions of Rs 136.8 do exist. One is not aware whether DFIs have also made similar provisions.

There are two methodologies for calculating the NPLs: under the first method NPLs are matched with total loans [NPLs/gross loans] and secondly net NPLs (NPLs minus the provisions) are matched with net advances (advances minus the provisions).

The NPLs worked out under the first method are called "gross NPLs" while those calculated under the second method are called "Net NPLs" The net NPLs, therefore, do not depict the ground reality and the method has been invented by the SBP simply to give rosier picture of the NPLs at a given point of time. Table 6.5 of the report indicates that the gross NPls are 16.1 per cent while net NPLs are 6.1 per cent as of end- March, 2004.

It would be recalled that the SBP Governor has been repeatedly asserting for quite some time that the net NPLs have come down to 5 per cent. He had mentioned this in the pre-budget seminar organized by an English daily of Lahore on the 26th May, 2004.

He had also quoted the same figure in his day-long interview with a private T V channel which was telecast a few weeks back. However, his own researchers have contradicted him by putting this ratio at 6.1 per cent.

However, the ratios of the gross/ net NPLs given in Table 6.5 of the report under review also do not seem accurate. These are calculated below: